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Exam 7: Accounting for Receivables

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Question 71

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The accounts receivable turnover indicates how often accounts receivable are received and collected during the period.

A) True
B) False

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Question 72

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For legal reasons, it is not advisable to accept a note receivable in exchange for an overdue account receivable.

A) True
B) False

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Question 73

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The matching principle permits the use of the direct write-off method of accounting for uncollectible accounts when bad debts are very large in relation to a company's other financial statement items such as sales and net income.

The process of using accounts receivable as security for a loan is known as pledging accounts receivable.

Installment accounts receivable is another name for aging of accounts receivable.

The aging of accounts receivable involves classifying each account receivable by how long it is past its due date and estimating the percent of each uncollectible class.

Explain the options a company may use to convert its receivables to cash before they are due.

Installment Accounts Receivable are classified as non-current assets if the installment period is more than one year, even if the seller regularly offers customers such terms.

A company that uses the percent of sales to account for its bad debts had credit sales of $740,000 in Year 1, including a $720 sale to Marshall Fresh. On December 31, Year 1, the company estimated its bad debts at 1.5% of its credit sales. On June 1, Year 2, the company wrote off, as uncollectible, the $720 account of Marshall Fresh. On December 21, Year 2, Marshall Fresh unexpectedly paid his account in full. Prepare the necessary journal entries: (a) On December 31, Year 1, to reflect the estimate of bad debts expense. (b) On June 1, Year 2, to write off the bad debt. (c) On December 21, Year 2, to record the unexpected collection.

Jervis accepts all major bank credit cards, including those issued by Northern Bank (NB) , which assesses a 3% charge on sales for using its card. On June 28, Jervis had $3,500 in NB Card credit sales. What entry should Jervis make on June 28 to record the deposit?

The Links Company uses the percent of sales method of accounting for uncollectible accounts receivable. During the current year, the following transactions occurred: $\begin{array}{|l|l|}\hline \text { Sept. 7 } & \begin{array}{l}\text { Links Company determined that the } \$ 8,000 \text { account receivable of the } \\\text { Rainier Company was uncollectible, and wrote it off. }\end{array} \\\hline \text { Oct. 15 } & \begin{array}{l}\text { Links Company determined that the } \$ 3,500 \text { account receivable of the } \\\text { Olympic Company was uncollectible and wrote it off. }\end{array} \\\hline \text { Nov. 9 } & \begin{array}{l}\text { Rainier Company paid } \$ 6,000 \text { of the amount owed to the Links } \\\text { Company, Links Company does not expect further collections from } \\\text { the Rainier Company. }\end{array} \\\hline \text { Dec. 31 } & \begin{array}{l}\text { Links Company estimates that } 1 \% \text { of its } \$ 1,900,000 \text { of credit } \\\text { sales would be uncollectible. }\end{array} \\\hline\end{array}$ 1. Prepare the general journal entries to record these transactions. 2. If the balance of the allowance for uncollectible accounts was a $4,000 credit on January 1 of the current year, determine the balance of the allowance for uncollectible accounts at December 31 of the current year. Assume that the transactions above are the only transactions affecting the allowance for uncollectible accounts during the year.

Federal laws prohibit the selling of accounts receivables to factors.

Factoring receivables is beneficial to a seller for all of the following reasons except:

Companies can report credit card expense as a discount deducted from sales or as a selling expense.

If a 90-day note receivable is dated July 12, what is the maturity date of the note?

Jax Recording Studio purchased $7,800 in electronic components from Music World. Jax signed a 60-day, 8% promissory note for $7,800. Music World's journal entry to record the sales transaction is:

Owens Company uses the direct write-off method of accounting for uncollectible accounts receivable. On December 6, Year 1, Owens sold $6,300 of merchandise to the Valley Company. On August 8, Year 2, after numerous attempts to collect the account, Owens determined that the account of the Valley Company was uncollectible. a. Prepare the journal entry required to record the transactions on August 8. b. Assuming that the $6,300 is material, explain how the direct write-off method violates the matching principle in this case.

Honoring a note receivable indicates that the maker has:

The matching principle, as applied to bad debts, requires:

The percent of sales method for bad debts estimation uses only income statement account balances to estimate bad debts.